Spark New Zealand/SPK

Spark NZ is the big NZ teleco operator.

The result wasn’t that great. The opening remarks from mgmt set the tone, “challenging macro”, + “our business is not immune”.

There is seasonality in the number, but it was still quite a modest half, even adjusting for that seasonality.

Management are expecting a stronger 2H showing…

Cashflows weren’t great either.

Mgmt here are basically saying “we spent more money upfront” and that since capex guidance isn’t changing, presumably the second half will be better, also.

Mobiles was a standout, with 47% market share of new connections.

Something that we like about SPK is the leverage to data centres. This is not a big part of the business, but SPK are aware that as a teleco they should have both and interest and an ability to deliver in what is the hottest part of the market right now (data centers to power AI).

Coming back to guidance, the below are “take it on faith” type circumstances. This was a soft half year result, but mgmt below are saying “prices increases we’ve put through, or passed on” + subscriber growth will get them there.

These are difficult situations to call. Their comments are fair, mgmt have a good track record, there isn’t much reason to doubt them, but, at the same time, if those forecasts prove overoptimistic and the “defensive resilient earnings stock” disappoints, that can often wipe 10% from the share price quite quickly. Arguably, that’s already happened, as the market digested the result, moving down from near $5.

So, in these kind of situations we care very much about balance sheet, long run earnings, and cashflows. The CFO, in their prepared remarks, gave further comfort on what we should expect from free cashflows. Assuming the below is accurate, there will be a material step up, all else equal, as that front-loaded capex (into 5G, and ERP type productivity initiatives) reduces.

So, if cashflows are good, and the balance sheet is in reasonable shape, things should be okay even if the company disappoints.

To that end, the balance sheet is fine, ND/EBITDA of ~1.3x is not a problem, and 1.91x including the operating leases. Management expect to be at ~1.7x by the end of the current half, driven by higher EBITDAI and lower capex, + normalisation of working capital.

This image has an empty alt attribute; its file name is image-14.png

Spark pays a yield of about ~5% which means we can afford to be patient.

The Q&A call also highlighted some of the details around moderating cost, specifically people, which is well taken.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Receive our investment insights

Something went wrong. Please check your entries and try again.